As Germany moves to slow rooftop solar, a note of caution to the US

As competition in the residential rooftop solar market heats up, utilities may looking longingly at Germany for how the government is considering stepping in to assist utilities.

Germany remains one of the leading solar markets in the world, despite sharp cuts in subsides there. It also has some of the most expensive electricity in Europe and the world. Power has gotten so expensive there that we’re seeing the first signs that third parties are entering the market to do commercial scale rooftop solar installations that compete with utility rates.

But not so fast. Last month Germany’s cabinet backed new regulations that would levy a charge on self-consumption of solar power in the commercial and industrial sector. It’s a pretty hefty levy—Euro 0.044 (about $0.06) per kilowatt-hour of self-generated energy consumed.

So what happened? The current system in Germany offers a surcharge of just over 6 Euro cents per kilowatt-hour on solar power delivered by utilities to customers. These surcharges are part of why Germany has some of the most expensive power in Europe. The surcharges are also why it’s become so attractive for utilities to develop solar. The surcharges are funneled into feed-in-tariffs that pay utilities a higher, guaranteed rate for generating more costly solar.

Market forces being what they are this sets up a massive incentive for commercial and industrial businesses to generated their own power, a practice which is much more common in places like India. But I believe this practice could become more common in the developed world due to the scalable and increasingly cost competitive nature of renewable energy. Almost a quarter of power generated for companies in Germany is self-generated.

This worries utilities and apparently the worries have been enough to pressure the German government into acting to levy surcharges on those in industry that seek to generate their own solar power. The president of the Federal Solar Industry Association in Germany is understandably displeased, describing the plan “like having a gardener pay a tax on the vegetables he grew himself in order to subsidize farmers.” If the proposal is drafted into law, it’s fair to say that solar deployment will slow somewhat, hurting both manufacturers and installers.

Germany is an interesting test case because the country has been the most aggressive policies in the world in mandating renewable deployment as it aims to completely wind down its nuclear power generation. Intervening in the market with surcharges has set up strange incentives to move off the grid.

Similarly, major solar producing states like Arizona and California must themselves address concerns about self-generating solar customers leaving the grid. The California Public Utilities Commission (CPUC) President Michael Peevey recently described fear that rooftop solar would disrupt utilities core business model as “last year’s hype.”

At the same time, however, Peevey acknowledged that the current net metering fights between utilities and solar customers would likely be resolved with “some reasonable fixed charge.” He noted that pro-distributed solar utility, the Sacramento Municipal Utility District had levied a charge in the range of $5 and $10.

Where this ends up, I believe, is in careful calculations intended to make rooftop solar about as expensive as utility generated power. That’s more or less what’s happening in Germany where surcharges that had been levied on utility bills are now being considered for self-generators at about 70 percent of the typical utility surcharge.

If this occurs the only true way for rooftop to be competitive is to offer a solution with battery storage so that customers can be completely grid independent. Those customers would then hope to avoid any grid connection fees.

In his speech Peevey noted that utilities that flourish will be those that gravitate toward a “service” model, which presumably includes an orientation towards their customers that results in them offering everything from smart thermostats to solar power in those markets where those services are desired.

I’d agree with Peevey but with regulated markets so prevalent in the utility space, utilities have historically had little incentive to innovate. And the services he believes they should offer are a direct result of the competitive pressure that is applied when innovative companies like Nest and SolarCity enter the market.

The work of these companies has pushed us closer and closer to greater energy efficiency and renewable power generation. And while it’s a balance of allowing utilities to seek redress through grid connection fees, one must acknowledge that the downside of those fees is that they’ll slow innovation and renewable energy deployment.